The retail sector experienced numerous challenges simultaneously this year: continued supply chain disruptions due to the pandemic and geopolitical crises; rising energy prices; inflation; and change economic policies.
As businesses battle rising costs, consumers are cutting discretionary spending, disproportionately affecting the retail and hospitality sectors.
In these turbulent times, the retail sector is looking for measures that can help improve profitability and reallocating its resources towards direct-to-consumer (D2C) commerce is a strategic decision that could achieve just that.
What are the pros and cons of D2C?
Because D2C removes the barriers between a brand and its consumers, companies can expect several benefits.
First, D2C can improve brand image by controlling the end-to-end buying process, from brand awareness to conversion and retention.
Second, D2C can identify marketing targets using vast amounts of consumer behavior data.
Third, D2C can improve brand profitability by eliminating rebates to distributors and/or wholesalers.
While there are benefits to D2C models, companies intending to select D2C as their business model should be aware of the increased responsibilities as a brand.
D2C brands are responsible for managing product manufacturing and distribution, online and offline marketing, and customer support.
Is D2C different from eCommerce?
Yes, because D2C does not restrict the brand’s offer to online channels only. For example, Gymshark recently opened its first retail store on Regent Street, the heart of London’s business district. Companies that operate under the D2C model typically use the following offline channels that operate directly:
- Retail stores with multiple functionalities (for example, a showroom or a click and collect and return point)
- Shop-in-shops at third-party retailer stores
- pop up shops
Is it worth the investment?
Yes, but remember that Rome wasn’t built in a day.
Nike is a good example of a brand undergoing a D2C transformation over time. Unlike brands established exclusively as D2C, Nike still generates more than 50% of its global revenue from the ‘traditional’ business model: sales through distributors and wholesalers.
The chart below illustrates how Nike increased the ratio of D2C sales to overall revenue and improved the company’s gross margin over the years.
While gross margin in 2020 declined due to the pandemic, Nike was able to get its customers to buy products directly.
Nike also reveals that there is a geographic difference in the penetration rate of the D2C business model (see chart below).
The key takeaways for brands that are or will be undergoing the D2C transformation are that the ‘traditional’ business model – selling through distributors and wholesalers may work better in certain markets due to the following reasons:
- The size of the target market is too small
- Target market consumer acceptance of online shopping is low
- The infrastructure of the target market is too fragile
There are three key investment areas to achieve a successful D2C transformation for business leaders: technologies; digital advertising; and supply chain.
How can I optimize my supply chain?
Whether your brand operates solely in the D2C business model or in the traditional D2C and hybrid business model, we recommend that you diagnose your existing supply chain network.
Planning a path for future growth by analyzing your supply chain strategy and operating model will help you with profit-maximizing opportunities, as well as drive logistics and network optimization, leading to a brighter horizon for your business.
Kenta Shibuya is a consultant, nnetwork and logistics optimization leader in 4C Associates
Shibuya is a management consultant with more than six years of experience gained in the consumer electronics, aerospace and automotive industries in Europe and Asia. He has led a wide range of supply chain projects, including network and logistics optimization and end-to-end planning, forecasting and execution. He has a strong academic background with an MSc in Supply Chain and Logistics Management from the University of Warwick.